Trading in A Car in Texas With Negative Equity: Is It Smart?

Key Takeaways

• Negative equity means you owe more than your car is worth, but you have options like paying it down, refinancing, selling, or rolling it into a new loan.
• Trading in a car with negative equity can be convenient and offer tax savings in Texas, but it often increases your total debt and long-term costs.
• The best choice depends on your situation, and you can reduce the impact by making a down payment, choosing a cheaper vehicle, and avoiding long loan terms.

Owing more on your car than it’s worth is stressful, especially if you’re ready for something new. Trading in a car in Texas with negative equity isn’t ideal, but there are still some potential advantages that make it worth considering. 

If you’re upside down on your auto loan, trading in your vehicle could make sense, but only if you take your time to consider the situation. Interested in trading in a car with negative equity? Read on to learn more! 

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What to Do If You Have Negative Equity on Your Car

Negative equity means you owe more on the loan than the vehicle is worth. For example, if your truck is worth $30,000, but you still owe $35,000 on the loan, you have a negative equity of $5,000. Being upside down on your loan can be an issue. If you’re involved in a crash, for example, the insurance payout may not be enough to pay off the loan. If you’re looking to sell the vehicle, you’ll still be left with a balance on the loan.

However, negative equity doesn’t necessarily mean you’re stuck. With the right strategy, you can minimize the financial impact and improve your situation. 

Here are your main options if you have negative equity:

• Keep the vehicle and pay down the loan: If the car is reliable, the simplest way to deal with negative equity is to continue making payments. Over time, your loan balance will decrease and your car’s value may stabilize. To pay the loan off faster you can:
  • Make extra payments towards the principal when possible
  • Round up your monthly payment
  • Avoid extending the term 
• Refinance the loan: If interest rates have improved or your credit score has gone up, refinancing could lower your monthly payment or help you pay off the loan faster. While refinancing won’t completely eliminate negative equity, it can reduce the financial strain on you. 
• Pay the difference and sell the car: If you’re in need of a new vehicle, you can sell the car and cover the gap between what you owe and what the car is worth. While you’ll need funds upfront for this, you can avoid rolling the negative equity into another loan. 
• Roll the negative equity into a new loan: Trading in a car with negative equity in Texas makes sense in some situations. Some dealerships allow you to roll the remaining balance into a new auto loan that is equal to 125% to 130% of the vehicle’s purchase price. While this is convenient, it will increase the total amount financed and push you deeper into negative equity. If you choose this route:
  • Make sure you have good credit 
  • Look for rebates or incentives to offset the negative equity
  • Choose a vehicle that holds its value well
  • Keep the loan term as short as possible
  • Consider a vehicle that costs less than the one you are trading in
• Check for GAP coverage. If you’re in an accident and your vehicle is totaled, standard insurance will only pay the car’s current market value, leaving you to pay the negative equity. GAP (Guaranteed Asset Protection) coverage can help cover the difference. If you’re planning to keep your vehicle, you can purchase a GAP policy for some peace of mind. 

Is It Good to Trade in a Car with Negative Equity?

Trading in a car with negative equity in Texas can be done, but is it a good idea? That depends on your overall financial situation as well as your long-term goals. Before you make any moves, here are some important things to consider:

It might make sense to trade in your vehicle if:

• Your current vehicle needs some costly repairs or is generally unreliable.
• You qualify for strong incentives or rebates.
• Your credit has improved since you financed your vehicle. 
• Your budget can handle the new payment. 
• You’re able to pay off the negative equity.

However, trading in negative equity can cause more financial hardship if:

• You’re already stretched thin trying to make payments.
• The dealership rolls the remaining balance into a longer loan term.
• You’re upgrading to a more expensive vehicle instead of downsizing.
• You plan to trade vehicles again in a few years. 

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Can You Transfer Negative Equity into a New Car?

Yes, you can usually transfer negative equity into a new car loan, but you will end up paying more in the long run. When you owe more on your current vehicle than it’s worth, the remaining balance doesn’t just disappear when you trade it in. Instead, the difference is added to your new auto loan.  

For example, let’s say:

• You owe $21,000 on your current car.
• The dealership offers $18,000 to trade it in.

That leaves you with $3,000 of negative equity. If you purchase a new vehicle for $25,000, your new loan could become: $25,000 (new car) + $3,000 (negative equity) = $28,000 financed. You’re now financing more than the new car is worth from day one, putting you in the same situation you were already in. 

So when do dealerships allow it? Lenders are often willing to finance up to 130% of a vehicle’s value if:

• You have strong credit
• You can put money down
• You choose a vehicle that holds its value well

Rolling negative equity into a new loan increases your total debt and can put you upside down again almost immediately. You can mitigate this by choosing a loan with a shorter term, but you will still pay more in the long run than if you had simply kept your vehicle with negative equity. 

Benefits of Trading in a Car with Negative Equity in Texas

While it comes with costs, trading in a car with negative equity in Texas can make sense in certain circumstances. Just make sure you carefully evaluate your situation before making any decisions. Some of the benefits of trading in your upside-down vehicle include:

• You pay less sales tax: In Texas, you only pay sales tax on the difference between how much the dealership offers for the trade-in and the cost of the new vehicle. Trading in your vehicle lowers the amount of sales tax you pay, which can help you save money upfront. Even if your vehicle has negative equity, you can benefit from the credit based on the appraised value of the car. 
• It’s more convenient: Finding a buyer can take a lot of time and effort, especially if you’re upside down on your loan. Selling a car usually involves listing the vehicle online, responding to messages from multiple people, meeting with strangers, handling paperwork, and coordinating your loan payoff. Trading in your vehicle is very convenient. The dealership handles everything so you don’t have to. 
• Many dealerships will take your vehicle “as-is”: If your car has high mileage, cosmetic damage, or mechanical issues, a dealership may accept it “as-is.” Private buyers, on the other hand, often expect repairs or try to negotiate aggressively based on flaws. If your car needs major repairs, trading it in can save you from investing more money into an asset that’s losing value. 
• Your loan gets paid off immediately: When you trade in a vehicle, the dealership pays off your existing auto loan right away. This takes away the stress of coordinating the payoff while selling the vehicle on your own. If there’s negative equity, it can be rolled into your new financing so you can move forward quickly. 
• You can reset your vehicle situation: If you’re downsizing to a less expensive car or securing a better interest rate, trading in your vehicle with negative equity can be a smart move, saving you money in the long run. 

How to Reduce the Impact

If you decide to trade in your car with negative equity, you can reduce the overall cost by:

• Making a down payment: The larger the down payment, the more you can offset the negative equity. 
• Choosing a less expensive vehicle: A less expensive vehicle means a smaller loan and a lower monthly payment. 
• Avoiding long loan terms: Choose a loan term of 60 months or lower. Loans that are 72 or 84 months long will cost much more, even with the same interest rate. 
• Looking for special offers: Shop around for rebates or special financing offers that will save you money. 
• Comparing offers from multiple lenders: Don’t just take the first offer you receive. Get offers from multiple lenders to find the best rates. 

Trading in a Car with Negative Equity in Texas Conclusion

Trading in a car with negative equity isn’t always the right choice, but there are some benefits if you play your cards right. In Texas, you may see sales tax savings when you trade in your vehicle. Plus, it’s much more convenient than trying to find a buyer or being stuck with a car that isn’t working for your life situation. 

Having questions about trading in your vehicle? Tipton Ford can help. Our friendly staff will walk you through the process, helping you determine if it’s the right financial choice for your situation. We have tons of new and used vehicles in our inventory, which means we can help you find the right car to support your long-term financial goals. Come visit us today to find your next vehicle!  We serve customers in Harlingen, Weslaco, and McAllen, as well as customers from San Antonio and Dallas. We have a huge selection of new and used cars to choose from, including the Ford F-150, Mustang, Bronco, and Ford Super Duty. 

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